Asian equities – from tutorial centres to dairy products – are driving earnings growth
Mark Davids and Joanna Kwok say demographic changes, lifestyle upgrades due to the growing middle class and financial deepening across the region make Asian equities the asset class to watch
Asia’s relevance to the world of investors has transformed in less than a generation and value creation in Asia equities has outpaced every other region by leaps and bounds – net profits in listed Asia ex-Japan companies have risen 33 times since 1999.
For investors who haven’t received the wake-up call yet, the inclusion of Chinese stocks into MSCI’s benchmark indices this summer is a harbinger of vast investment opportunities. As China gradually opens up – and China’s liberalisation is a structural force the path of which is clear – its listed markets will come to dwarf the rest of the region.
But three of the most sustainable and compelling drivers of earnings growth in Asia that are creating investment opportunities today aren’t unique to China. They can be found in companies from the Philippines to India.
Made for each other: Indian start-ups and Chinese investors
One major driver of change in Asia involves significant demographic changes, which can be represented in business models that are unfamiliar in the West – for example, China’s booming after-school tutoring industry.
Once an informal network of parents and teachers investing in what was often a single child’s educational path, this industry now generates US$60 billion in revenues. With birth rates rising and university entry in China remaining hyper competitive, companies like market leader TAL Education are generating upwards of 40 per cent compound annual growth rates in earnings.
Another leg of the Asia growth triumvirate is lifestyle upgrades driven by consumption growth. Middle-class consumers across emerging markets are overtaking baby boomers as an engine of global growth. Alibaba, for example, is often held up as a token of China’s e-commerce dominance, but the investment case for Alibaba is as much a consumption story as it is about technology.
On the sales bonanza known as Singles' Day in 2017, Alibaba generated around US$10 billion in revenue in a single hour from consumer bargain-hunting. It took Amazon 30 hours to generate just US$1 billion on Amazon Prime Day.
Some lifestyle upgrade stories are more prosaic on the surface, but no less important. For example, more affluent families can afford to buy dairy products in Vietnam, enabling companies like Vinamilk to deliver solid revenue growth and margin expansion.
A third driver of Asia growth is what we term financial deepening, or the provision of financial services such as insurance and banking to an increasing number of consumers. China faces a massive life insurance protection gap and companies like Ping An, which is the largest insurance company by market capitalisation globally, should be beneficiaries. As a leading personal finance services group with core businesses across insurance, banking and investment, Ping An has invested in and incubated a string of businesses creating value for shareholders.
In the region’s other continental economy, albeit one at a very different stage of development, India’s HDFC Bank offers another example of financial deepening. HDFC is at the forefront of digital banking, a model accelerated dramatically by the Indian government-mandated Aadhaar programme. This unique ID database contains biometric data on over 1.2 billion people, accounting for 95 per cent of India’s population, on the back of which huge numbers of new bank accounts have been opened.
Coupled with increased smartphone and data penetration, digital payments in India have grown 10 times over the past four years, helping to strengthen market leader HDFC Bank’s 28 per cent share of the Indian mobile banking space. The public sector banks are a long way behind and we believe they will continue to lose market share given their slimmer capital positions, less-advanced infrastructure and relative management challenges. Beyond the enlarged lending opportunity, HDFC’s move to digital will also enable it to cut operating costs.
The Asian region is accounting for an ever-larger slice of the world’s corporate earnings. In the liberalising China A-share market, investors can access the second most liquid pool of capital in the world. We are finding a growing number of regional companies with world-class business models. The risk for global investors of missing out on the Asia growth story is simply becoming too important to ignore.
Mark Davids and Joanna Kwok are portfolio managers at J.P. Morgan Asset Management